Like other parts of the country, Baton Rouge has been subject to condominium fever the past few years—both new construction and conversions.
Then the national housing bubble burst, the lending market tightened and, as a result, fewer people bought condos. The upshot is that many of those condo units intended for owner occupancy are now on the rental market—not just conversions, but new construction as well.
“Big time, it’s happening,” says appraiser Wesley Moore of Cook, Moore & Associates. “It started to happen about a year ago, but we started to feel the full brunt of it by the middle of the summer.”
One of many examples is The Blox at Brightside, Donnie Jarreau Companies’ 102-unit, $10 million conversion of a former military barracks on Brightside Lane south of LSU. It wasn’t a small job; the barracks were more than 40 years old and in sorry shape after years of neglect.
The first phase—a little more than 40 units—sold with no problem, Jarreau Companies broker Kent Walker says. The remaining units weren’t moving, so onto the rental market they went, Walker says. They rented quickly at $1,000 to $1,300 a month. The units sell from $129,500 for a one-bedroom unit to $159,500 for a three-bedroom unit.
Another example is Indigo Park on Nicholson Drive just north of Bluebonnet Boulevard. The owners decided more than a year ago to switch over to apartments—nicely appointed ones at that—after slower-than-expected sales.
“Fractured” is the industry term for a condo that combines owner-occupied and rental units. In some cases the original developer might still own the rental units, or they might be sold off in one chunk to somebody else.
“In some cases, it might make it harder for would-be buyers to qualify for certain types of mortgage financing, if that financing requires a minimum owner-to-tenant ratio and the condo in question doesn’t meet it,” Moore says.
From the developer’s standpoint, it means taking units they’ve spent $15,000 to $30,000 to bring them up to condo grade—granite countertops, fancy appliances and the like—and then letting renters loose on them.
“You have to weigh is it worth it,” Moore says.
Not every condo is facing the same situation. High-end complexes like Mike Wampold’s Crescent at University Lakes and Tommy Spinosa’s Terraces at Perkins Rowe are doing well, though the Perkins Rowe condos are offering leasing as an option.
Sandy Avery of R.W. Day & Associates says she’s sold 56 of the 60 units at the developer’s new Pelican Lakes condo project on Burbank Drive and has only four for rent. Day has finished construction on the first phase and plans to build another 60. Avery doesn’t anticipate any problems selling those units either. Prices average around $240,000.
“If you build a good product and price it correctly for the market you’re looking for, you’re going to sell it,” she says.
Walker attributes the slowdown not just to the tighter lending market, but also to a saturated condo market locally and a “wait-and-see attitude” during economically scary times.
“Just like with cars, if people don’t absolutely need it they’re not buying it,” he says.
If there’s a downside from the developer’s perspective, it’s being forced to deviate from the original plan, expending resources to operate a property instead of selling it quickly to concentrate on the next thing. On the plus side, Walker says, rentals do create a cash-flow asset.
“That’s the great thing about having residential units like that: If you can’t sell them, rent them,” he says.
You might think so many condo units entering the apartment market would create a glut. It hasn’t, Moore says. He concedes his prediction that the apartment market would be soft by the end of the year was wrong. The Baton Rouge market has roughly a 3% vacancy rate. Nationally, it’s about 7%; Houston has a 12% vacancy rate.
The same borrowing difficulties that are keeping people from buying condos are keeping them from buying homes, Moore says. This helps maintain a tight apartment market. Baton Rouge has plenty of apartments built since 2007—many fueled by GO Zone money—almost as many units constructed in 2007 and 2008 than the eight years before that, he says.
The rarity of incentives such as the first month free is a sign renters aren’t hard to come by, Moore says.
“We are absorbing them,” he says. “I’m not getting reports of slow absorption or significant concessions, which tells me competitive conditions have not forced managers into giving away the farm. As long as the mortgage market and credit crunch continues, the apartment market will remain tight.”
Allen Walsh, a local real estate developer, has converted several condo projects. He says the market for condo sales has slowed, but it hasn’t disappeared completely. Walsh has put some units back on the rental market but is also maintaining an inventory of sales units.
The Jeffersonian, Walsh’s 63-unit conversion on Jefferson Highway, quickly sold its first phase of 29 units in the $135,000 range. The second phase is moving much more slowly. Walsh has sold five out of 34 units so far.
Live Oak Circle, a 70-unit Walsh conversion off Southpark Drive between Airline Highway and Coursey Boulevard, started providing owner financing after the mortgage market crashed and was able to get owners into its last 20 units last summer.
Walsh says the point of condo conversion is to convert real estate to cash, “and that would be our first choice.” Fortunately, it’s a flexible product.
“When you’re presented with issues on sales,” he says, “that creates a situation where you need to take advantage of the opportunity that the folks who may not be able to purchase at this particular time will be able to lease and will be fully capable of being strong tenants.”